An Example of Leverage:
With real estate, people and companies will lend you money to invest. How much real estate can you buy with $20,000? Probably between $100,000-$300,000, depending on the lender. So you only really need a small portion of the funds to buy an expensive asset.
High level of control: With real estate you can do things such as write your own terms for the contract, increase the properties value, increase the rent, build, subdivide, negotiate lending terms. Although you have a high level of control with a business, it is a bit more risky. How much can you influence the price of stock? Well, not a lot unless you are within the company.
Capital gains: With real estate you can instantly create wealth and equity by buying the property at a discount. Also the property can appreciate over time. For example,
Growth is 8%. You buy a property for $125,000 with a $12,500 deposit.
First year value: $135,000
Second year value: $145,800
Third year value: $157,464
Tenth year value: $269,865:
$12,500 was turned into a gain of $144,865: over ten years! Just imagine if you had a property in an area of 10% growth!
“Yes, but the value of property can go down too!”. True the property market can go down, but if you follow the right investment strategies you wont loose money. It is that true the property market can go down. However if you never sell how will you loose money? You may loose equity at some point but the prices are bound to eventually come up again. Even if the prices are down you are still collecting the rent weekly so there should be no problem.
The capital gains would be enough of a reason just to invest in real estate. But apart from your keeping your money safe, it can also provide you with a profit. Going back to the previous example,
You have an interest only loan for $112,500. Lets assume the property has a 9% yield and the interest rate is at 5%.
Rent from property per annum:$10,125
– Interest payments per annum: $5,625
– property taxes per annum: $1,000
– Insurance per annum: $600
– Repairs: $200
– Property manager: $1,000
Before tax profit: $1,700
Now whether you loose profit or gain profit at this point depends on where you live and the tax laws. For example in New Zealand from this point you could claim depreciation of building and chattels and make more profit after tax. You may also receive a tax break on the interest you pay on your loan. However even if you were taxed on the $1,700 you would still make money.
Insurance:: How much would it cost to insure a business? The premiums would be HUGE! On the other hand, how much does it cost to insure a property, not a lot. Even if natural disaster occurred, with the right insurance plan you wouldn’t loose money.
Demand:: Home ownership is decreasing throughout the world, therefore it is more common for people to rent properties today then ever before. This will work in your favor because if demand is increasing for rental properties, prices for rent will go up.
To sum it up using out example::
You have made a deposit of $12,500 to buy you a $125,000 asset which, is becoming more in demand, in ten years can increase to $268,865 giving you equity along with a passive income of $1,700 per year!